I believe the 192.168.122.1 comes first due to the
/etc/dhcp/dhclient.conf configuration: prepend domain-name-servers
192.168.122.1;

It might also have come first as a result of my previous debugging
efforts. (Sorry. :)

I think the .local VM FQDN lookups are using mDNS -- at least, wireshark
showed a fair amount of mDNS traffic but no DNS traffic when I just now
tested.

I've made some changes to my /etc/init/lxc-net script, stolen the
dnsmasq package's resolvconf hook script -- I'll test it shortly.
Thanks!

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https://bugs.launchpad.net/bugs/1163147

Title:
  Please run dnsmasq in such a way that it can also be used on the host
  — to look up the VMs' names

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